Answer:
a. Price of Bond is $1,333.33
b. Less
Explanation:
a.
Current yield is the ratio of coupon payment to the market value of the bond. It is the rate of income received from bond at current market rate.
As given
Coupon Payment = $1,000 x 8% = $80
Current Yield formula is as follow
Current Yield = Coupon Payment / Market Value
6% = $80 / Market Value
Market Value = $80 / 6%
Market Value = $1,333.33
b.
As we know that
if Price > Face value then YTM < Coupon rate
if Price < Face value then YTM > Coupon rate
if Price = Face value then YTM = Coupon rate
According to given condition
$1,333.33 > $1,000 then YTM < 8%
The bond’s yield to maturity is less than 8%.
Bond current yield is the annual interest paid by a bond expressed in %
6% = ($1,000 * 8%) / Current selling price of the bond
6% = $80 / Current selling price of the bond
Current selling price of the bond = $80 / 6%
Current selling price of the bond = $80 / 0.06
Current selling price of the bond = $1333.33333333
Current selling price of the bond = $1,333.33
Therefore, the bond’s price is $1,333.33.
if Price > Face value then YTM < Coupon rate
if Price < Face value then YTM > Coupon rate
if Price = Face value then YTM = Coupon rate
Now, $1,333.33 > $1,000 then YTM < 8%. Therefore, the bond’s yield to maturity is less than 8% because it is a premium bond.
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